The True Gold Standard (Second Edition)
The president of the European Central Bank sought on Monday to ease fears that countries including Japan were deliberately weakening their currencies.
The comments by the president, Mario Draghi, appeared to show how some of the world’s most senior economic policy makers were continuing to limit the possibility of a so-called currency war.
Over the weekend, finance ministers from the Group of 20 pledged to refrain from devaluing their currencies to gain a competitive advantage in global trade.
During an afternoon of scheduled testimony before the European Parliament’s economic and finance committee in Brussels, Mr. Draghi said that the euro’s current exchange rate was close to its long-term average. He advised officials not to make alarmist comments.
“Most of the exchange rate movements that we have seen were not explicitly targeted; they were the result of domestic macroeconomic policies meant to boost the economy,” Mr. Draghi told the committee, without mentioning any countries by name. “In this sense, I find really excessive any language referring to currency wars.”
But Mr. Draghi also seemed to suggest that central banks could succumb to mutual suspicion about whether exchange rates were being deliberately weakened.
The last time the world as we knew it seemed likely to end, Dan Tapiero thought about buying gold.
He didn’t tell his wife; they didn’t talk about things like that. In fact he didn’t tell anyone for a while. He just tried to figure out how he was going to buy physical gold as the financial markets collapsed at the end of 2008.
Mining stocks were not for him, and neither was buying gold on the futures exchange. That was financial gold, meaning it existed on account statements but was not tangible. He wanted the real thing, gold in the form of bullion that he could hold in his palms, smudge with his thumbs.
But Mr. Tapiero, a portfolio manager at several hedge funds over the last two decades, realized quite quickly that it was harder to fulfill his desire than he had thought. When he called up one bank he patronized in his day job, he learned it had a minimum purchase amount of $20 million worth of physical gold. Even at that amount, he could not have access to it; it would have to stay at the bank.
He didn’t want to buy that much, but he wanted to buy more than a bag of gold coins, or a bar or two. Most of all, he wanted to know that it would be stored someplace safe where he could get to it even if all of the banks suddenly closed for a while. “There was concern at that time that the system was frozen and you didn’t really know whether you were going to be able to have access to your money or to your assets,” Mr. Tapiero said. “And I started thinking, O.K., well, I’d like to own something that isn’t a number on a flashing screen.”
Investing in physical gold has had an image problem of late. After the financial crisis, it was seen by many mainstream advisers as something that crackpots coveted. They would buy it, store in their basements and know that their wealth was secure if the world — or at least the prevailing financial and political systems — ended.
A Treasury economist rummaging in the department’s library has stumbled on a historical treasure hiding in plain sight: a transcript of the Bretton Woods conference in 1944 that cast the foundations of the modern international monetary system.
Historians had never known that a transcript existed for the event held in the heat of World War II, when delegates from 44 allied nations fighting Hitler gathered in the mountains of New Hampshire to create the International Monetary Fund and the World Bank. But there were three copies in archives and libraries around Washington that had never been made public, until now.
“It’s as if someone handed us Madison’s notes on the debate over the Constitution,” said Eric Rauchway, a historian the University of California, Davis.
Economic historians who have viewed the transcript say it adds color and detail to the historical record, an already thick one given the many contemporaneous and subsequent accounts of Bretton Woods. The transcript seems to contain no great surprises, but it sheds light on the intense debates as the war raged abroad.
It depicts John Maynard Keynes, the British economist, hurrying to marshal support for the broad agreements on international finance. It underscores the tremendous power then wielded by Britain and, especially, the United States. It also shows the seeds of contemporary disputes being sown.
For instance, seven decades ago, a number of poorer or smaller countries were protesting their International Monetary Fund quotas, which determine power in the fund. Many of those countries, including China and India, are still pushing for more influence today.
Under a gold standard, the dollar would be valued at a certain number of grams of gold, and the government would be ready to buy or sell gold to anyone based on that value.
The commission’s report was delayed and when finally released called for a continuance of the monetary status quo, albeit with the possible issuance of American gold coins to compete with the South African krugerrand. The platform plank turned out to have no real meaning, and gold bugs were outraged.
The commission, Murray N. Rothbard, a libertarian economist, later complained, was “overwhelmingly packed with lifelong opponents of gold who buried any call for a hard currency.” Ms. Schwartz noted that Treasury Secretary Donald T. Regan, who was the commission’s chairman, and Murray Weidenbaum, a member who was Mr. Reagan’s top economic adviser, “did not tip their hands until the final two meetings of the commission.”
Mr. Gingrich did send a signal that his commission would be different. He said the co-chairmen would be Lewis Lehrman, the author of a recent book titled “The True Gold Standard,” and James Grant, the editor of Grant’s Interest Rate Observer.
“The fundamental conclusions of a Lehrman-Grant commission to consider a gold standard may be foregone: We’re for it,” Mr. Grant wrote in the latest issue of his publication.
Mr. Lehrman, in fact, was one of the two dissenters to the Reagan commission report. The other dissenter was a Texas congressman named Ron Paul.
More than almost any other dispute in economics, gold often seems to be a matter of theology. To supporters, gold has been money for thousands of years, and a return to it is the only way to keep politicians from debasing currencies. To most current economists, gold is a commodity, subject to the normal fluctuations of supply and demand. To them, the supply of money should be controlled based on economic principles. With a gold standard, the amount of gold available to back money could grow only at the same rate that gold stocks increased, something that depends on mining successes, not on the needs of an economy.
The Democratic Party Never in Favor of Fiatism.
Declarations of the Chicago Convention in Direct Opposition to Utterances of Jackson, Jefferson, and Benton--Distinct Approval of the Gold Standard Shown in Official Acts of These Men and Other Early Democratic Leaders.
October 12, 1896 - John R. Procter of Kentucky, President of the Civil Service Commission, has been looking over The Congressional Record in order to determine the ground the Democratic Party has held in times past with reference to the gold standard. Speaking to-day of his researches, Mr. Procter said:
“My study satisfies me that the framers of the Constitution and the wise founders of our Government were united and determined that the coined value of our gold and silver money should correspond with the market value of the bullion contained. This is demonstrated by the writings of Jefferson, Madison, Monroe, and Hamilton. The Constitution gave to Congress the power ‘to coin money and regulate the value thereof, and of foreign coins, and to fix the standard of weights and measures,’ not to fix the standard of value, but to regulate it as fixed by the market price of gold and silver.
“Mr. Jefferson wrote: ‘Just principles will lead us to disregard legal proportions altogether, to inquire into the market price of gold in the several countries with which we shall be connected in commerce, and take an average from them.’
Hamilton Was Mistaken.
“Hamilton, in his first message as Secretary of the Treasury, said that to make a greater difference than one-half of 1 per cent between the coined value and the market value of the gold and silver would be unsafe. Hamilton was a bimetallist, and believed that the ratio which he proposed— 15 to 1—would keep gold and silver in concurrent circulation.
“In this he was mistaken. An ounce of gold gradually became worth more than fifteen ounces of silver, and a slight undervaluation by the act of 1792, drove gold out of circulation; and in order to bring gold again into circulation, and place the country on a gold standard the Democratic Congresses of 1834 and 1837, led by the Administration of Andrew Jackson, adopted a ratio of sixteen ounces of silver to one ounce of gold, notwithstanding the arguments that this ratio would drive silver out of circulation, as the commercial ratio was 15.60 to 1.
Benton on the Gold Bill.
“Mr. Benton, arguing in favor of the passage of the bill of 1834, which was called at the time the ‘Administration Gold bill,’ advocated gold because it was the ‘safest standard of value of property,’ that it had uniformity of value because of its superiority over all other money, which gave its possessor the choice and command over all other money because of its power over exchanges, gold being the currency which contributes most to the equalization of exchange, and keeping down the rate of exchange to the lowest and most uniform point,’ and ‘because it IS the Constitutional currency, and the people have a right to demand it as currency as long as the Constitution of the United States is permitted to exist.’
“This bill was passed by a vote of 145 to 36 in the House, and by a vote of 35 to 7 in the Senate; was signed by Andrew Jackson, and because of the prosperity following this act, Benton was fondly called ‘Old Bullion.’
Andrew Jackson for Gold.
“Andrew Jackson was so pleased with the result of this bill of 1834, bringing gold into circulation, that on his first trip to Tennessee, he ostentatiously paid out gold at all the stopping places along the route. Writing from Washington, Dec. 26, 1836, to the Rev. A. S. K. MaCallum, President Jackson said:
“'I am obliged to you for the favorable manner in which you speak of some of my late public measures, which the pure and intrinsically valuable material of the useful and beautiful present you tender gives occasion to introduce, as you seem to think, not inaptly. The useful and ornamental purposes to which gold can be applied are the properties which give it real value and render the demand for it universal.
“'This, with other peculiarities, has made it in all ages, throughout the world, the standard of value. There is no fraud in gold. Is therefore the true representative of the principles of Justice and equality which should enter into everything that operates in our institutions, and should be ever insisted on by the industrious classes as the actual circulating medium to bring continually to the test every species of currency, and to suppress the spurious paper system, resting on no solid basis, and giving birth to frauds and stock gambling.’
“As silver had gone out of circulation after the act of 1834, and as the subsidiary coinage contained relatively as much bullion as the dollar—two halves or four quarters containing the same amount as the dollar—the subsidiary coins, as well as the dollars, went out of circulation. To restore silver for the purpose of change, R. M. T. Hunter of Virginia, as Chairman of the Senate Committee on Finance, brought in a bill on March 9, 1852, diminishing the amount of silver in the subsidiary coins, in order to keep them in circulation. Notwithstanding Senator Hunter was a bimetallist, it is well for the bimetallists of the modern school to read his significant language, used in the report or the committee, signed by him.
“'But if silver is not made a legal tender—and it is not made so in Great Britain, except for small sums—it can only circulate for such purposes. To make it a legal tender at such rates, rates beyond its bullion value, would debase the standard and expel the gold. Whenever the relation between the market and mint values of gold and silver shall promise a reasonable degree of stability, there can be little doubt that there should be a readjustment of the mint values of these metals. The great measure of readjusting the legal ratio between gold and silver cannot be safely attempted until some permanent relations between the market values of the two metals shall be established.’
“Mr. Dunham of Indiana, who was the Democratic Chairman of the committee reporting this Senate bill in the House, ‘Feb. 1, 1853, explaining the meaning of the committee said:
“'They (the committee) desire to have the standard currency to consist of gold only and that these silver coins shall be entirely subservient to it, and that they shall be used rather as tokens than as standard currency, and they propose to maintain their credit and circulation not only by limiting the supply to the wants of the country, but by making them receivable for all public dues to the United States. We mean to make gold the standard coin, and to make these new silver coins applicable and convenient, not for large, but for small, transactions. I trust this sufficiently explains the reason for our pursuing this course.
“'Whenever the experiment of a standard of a single metal has been tried it has proved eminently successful. Indeed, it is utterly impossible that you should long at a time maintain a double standard. We have had but a single standard for the last three or four years. That has been gold. We propose to let it remain so, and to adapt silver to it, to regulate it by it.
Mr. Skelton’s Explanation.
“In the debate that followed, Mr. Skelton used the following language: ‘But I anticipate a difficulty here. As long as we have two metals circulating as legal tenders for debts, the relative value of the metals in the commercial market is constantly liable to change and, no doubt will change.
But, in order to meet this difficulty, a committee of the United States Senate has proposed a remedy, and’ that is that they will make the silver coin so light that it will be of less value, commercially, than the gold coin; and in order to prevent any injustice arising from that, they say that the silver coin shall not be made a legal tender for debts of over $5. Now it appears to me that this meets the difficulty in both cases.’
“It will thus be seen that this act was thoroughly understood, that its intention was to place the country on a single gold standard, and that it did have that result. It was passed by a Democratic Congress. The bill was passed in the Senate, which stood 37 Democrats to 34 Whigs, without division, and in the House, which stood 145 Democrats to 90 Whigs, by a very large majority. John C. Breckinridge, and other men who became prominent in Democratic councils afterward, advocated and voted for this bill.
All will agree that the decade of the fifties was the most prosperous decade in our history to the agriculturists in all parts of the country. There was not a dollar of American silver in circulation, and hardly enough silver coinage to meet the requirements for making change. The country was on a single gold standard, and remained there until the legal-tender act of 1862. The coinage act of 1873, which has been called ‘the crime of ‘73,’ simply recognized an existing fact. The country had practically been upon a gold standard since 1834. Silver dollars had gone out of circulation. The few that had been coined had been melted up into bullion.
The Chicago platform of 1896 declares that ‘Congress alone has the power to coin and issue money,’ and demands ‘that all paper money shall be issued directly by the Treasury Department.’ This is an entire reversal of all Democratic doctrines from the formation of the Government to the present day.
“It was decided in the Constitutional Convention by a vote of nine States, against New-Jersey and Maryland, that the power to issue paper money should not be granted to the Federal Government.
Madison and Jefferson.
“Mr. Madison in his narrative of the proceedings says:
“'Thus the pretext for a paper currency, and particularly for making the bills a legal tender, either for public or private debts, was cut off.’
“Mr. Jefferson, writing to John Taylor in 1798, said:
“’I now deny their (Congress’s) power of making paper money, or anything else, a legal tender.’
“The Constitution gave to Congress the power to raise money by taxation or toI borrow money, but no power to issue money. On this point Mr. Benton, who used to be good Democratic authority, said:
“Every clause in the Constitution which bears upon the subject of money—every statute of Congress which interprets the meaning of these clauses—and every historic recollection which refers to them, go hand in hand in giving to that instrument the meaning which this proposition ascribes to it. The power granted to Congress to coin money is an authority to stamp metallic money, and is not an authority for emitting slips of paper containing promises to pay money.
“‘The authority granted to Congress to regulate the value of coin is an authority to regulate the value of metallic money, not paper. The prohibition upon the States upon making anything but gold and silver a legal tender is a moral proposition found in virtue and honesty, and is just as binding on the Federal Government. The States may do all things which they are not forbidden to do; and the Federal Government can do nothing which it is not authorized to do.